Which of the Following Is an Example of a Detective Control in a Company?

Detective controls play a crucial role in a company’s internal control system, identifying and addressing errors or irregularities after they occur. These measures safeguard the integrity of financial data and ensure compliance with regulatory standards, helping organizations detect fraud, operational inefficiencies, and unintentional mistakes.

Reconciliation Checks

Reconciliation checks are a cornerstone of a company’s financial controls, comparing two sets of records to confirm consistency and accuracy. For example, matching bank statements with internal cash records can reveal discrepancies due to errors, omissions, or unauthorized transactions. Reconciling accounts payable with supplier statements ensures recorded liabilities are accurate and complete.

A systematic approach, often supported by accounting software, streamlines this process. Automated systems flag anomalies, such as duplicate entries or unmatched transactions, prompting further investigation. For instance, a significant variance between a bank balance and the book balance during reconciliation could indicate unrecorded transactions or bank errors requiring immediate attention. Promptly addressing these issues preserves financial data integrity and prevents costly mistakes.

Surprise Audits

Surprise audits strengthen internal controls by uncovering irregularities that routine audits might miss. These unannounced evaluations examine financial records and operational processes, reducing the risk of fraud since employees have no opportunity to manipulate records in anticipation.

The unpredictability of surprise audits is key to their effectiveness. Conducted at random intervals, they can focus on areas such as inventory management or expense reporting. For instance, a sudden audit of petty cash funds may reveal unauthorized expenditures or misappropriation. Beyond financial records, these audits can assess compliance with safety regulations or adherence to company policies, fostering a culture of accountability and transparency.

Physical Stock Counts

Physical stock counts verify the accuracy of inventory records, identifying discrepancies between recorded and actual stock levels. This process can uncover theft, damage, or administrative errors that digital records alone might miss.

To minimize disruptions, companies often conduct these counts during periods of low activity, such as after business hours or during off-peak seasons. Using two-person teams ensures cross-verification and reduces errors. Advanced technologies like RFID scanning and barcode systems further streamline the process, providing real-time inventory updates.

Regular physical stock counts not only detect inaccuracies but also inform inventory management strategies, such as demand forecasting and stock optimization. These counts are critical for compliance with accounting standards like IFRS and GAAP, which require accurate inventory reporting. The insights gained can enhance operational efficiency and profitability.

Exception Reports

Exception reports are a sophisticated control tool that highlights anomalies and deviations from expected performance. Generated automatically by accounting or management systems, they flag transactions or activities outside predefined parameters. For example, an exception report might identify invoices exceeding a specific dollar amount or purchase orders without proper approvals.

These reports are configured to align with a company’s policies and risk management strategies. For instance, a system might generate a report for expense claims exceeding $500 without managerial approval. By focusing on high-risk outliers, resources can be allocated efficiently to investigate and address irregularities. Exception reports also support regulatory compliance, such as with the Sarbanes-Oxley Act, which requires stringent internal controls over financial reporting.

Transaction Log Analysis

Transaction log analysis provides a detailed view of financial and operational activities, helping organizations identify unusual patterns, unauthorized activities, or errors. These logs, which document critical details like timestamps, user IDs, and transaction amounts, serve as a digital trail that can pinpoint the source of anomalies.

Advanced analytics tools and machine learning models enhance the analysis process by detecting irregularities against historical data. This approach is particularly effective in uncovering subtle fraud, such as round-dollar transactions or repeated adjustments just below approval thresholds. Transaction log analysis also supports compliance with regulations like PCI DSS, which requires monitoring access to sensitive data.

Beyond fraud detection, analyzing transaction logs can reveal inefficiencies in processing times or bottlenecks in approval workflows. Addressing these issues improves internal processes and reduces errors. Maintaining comprehensive logs is often a regulatory requirement, enabling organizations to provide accurate records to auditors or regulators when necessary.